Testing a trading Plan
Before they begin in the market, some traders find it helpful to ‘paper trade’ the market for a while. This involves taking ‘hypothetical’ positions in the market and then monitoring these to see what the outcome will be.
Before doing any physical futures trading at all, the first move is to start by paper trading. A trading plan must be able to be measured. E.g. “I’ll risk no more than 2% of my capital on any given trade”. It can’t say “I won’t use too much of my equity for margin.”
Traders whose systems are more technical in nature will ‘back test’ their system against historical market data to determine the success of the system in that particular market. A trading system can be as simple as a few rules or as complex as a Black box technical analysis package. The key is that the system matches your personal trading style. You can either create a system from scratch or buy a readymade package. Either way it is advisable to test the system with dummy trades before doing the real thing. Some experts recommend 10 years of back testing with historical data...
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